Trading Online Based On The Relative Strength Index
12:52 AM
Investors who want to learn stock market investing often turn to technical analysis for objective and unbiased guidance as to when they should enter or exit a particular position. As discussed in other parts of this Technical Analysis series, some events are simpler to determine than others, especially for people who are just starting to learn stock market investing techniques. The Relative Strength Index (RSI) of a security would be medium-difficult.
What Is Relative Strength (RSI) An oscillator, RSI measures a security's relative strength compared to its own price history. What this does for the investor is provide insight into overbought and oversold conditions and can also help identify support and resistance levels better than the price chart itself can.
How Relative Strength Works As far as getting a reading from the RSI, the signals are a little different than other covered in our technical analysis series. Instead of getting a clear buy or sell signal, the RSI will produce three different results depending on its value. From 0 to 30, the RSI suggests a security is oversold; 30 to 70 is in range, and; 70 to 100 is considered overbought. Depending on other circumstances facing the investor, different trade signals may be produced.
The RSI Calculation Coming up with RSI for a given security is a lot more involved than many of the other calculations covered by technical analysis. To compute the RSI, we use: 100 - [100/(1 + A)] where A is made up of the average number of up days divided by the average number of down days for that same period. For example, if take a period of 14 days (commonly used for RSI) and have 7 up days and 7 down days, then the RSI would be 50.
Trading the RSI Unlike other indicators, the RSI does not simply provide black-and-white buy or sell recommendations. Instead the RSI can provided a number of key pieces of information. First the RSI is often better than the underlying security's price chart at demonstrating key support and resistance levels. Second, the RSI will show whether a security is overbought (level between 70 and 100) or oversold (between 0 and 30). These bearish and bullish signals can help investors determine whether to exit an existing position or open a new one, either on the long end or the short end. Relying on the RSI to confirm a prospective trade is really the entire point of using technical analysis in the first place.
Trading software can alleviate a lot of the time consuming and draining calculations needs to produce a solid buy or sell signal. Although technical analysis involves many aspects and signals, such software can change an individual investor's experience from overwhelmed to simple... or at least make it simpler.
What Is Relative Strength (RSI) An oscillator, RSI measures a security's relative strength compared to its own price history. What this does for the investor is provide insight into overbought and oversold conditions and can also help identify support and resistance levels better than the price chart itself can.
How Relative Strength Works As far as getting a reading from the RSI, the signals are a little different than other covered in our technical analysis series. Instead of getting a clear buy or sell signal, the RSI will produce three different results depending on its value. From 0 to 30, the RSI suggests a security is oversold; 30 to 70 is in range, and; 70 to 100 is considered overbought. Depending on other circumstances facing the investor, different trade signals may be produced.
The RSI Calculation Coming up with RSI for a given security is a lot more involved than many of the other calculations covered by technical analysis. To compute the RSI, we use: 100 - [100/(1 + A)] where A is made up of the average number of up days divided by the average number of down days for that same period. For example, if take a period of 14 days (commonly used for RSI) and have 7 up days and 7 down days, then the RSI would be 50.
Trading the RSI Unlike other indicators, the RSI does not simply provide black-and-white buy or sell recommendations. Instead the RSI can provided a number of key pieces of information. First the RSI is often better than the underlying security's price chart at demonstrating key support and resistance levels. Second, the RSI will show whether a security is overbought (level between 70 and 100) or oversold (between 0 and 30). These bearish and bullish signals can help investors determine whether to exit an existing position or open a new one, either on the long end or the short end. Relying on the RSI to confirm a prospective trade is really the entire point of using technical analysis in the first place.
Trading software can alleviate a lot of the time consuming and draining calculations needs to produce a solid buy or sell signal. Although technical analysis involves many aspects and signals, such software can change an individual investor's experience from overwhelmed to simple... or at least make it simpler.
About the Author:
Chris Blanchet has over 16 years as a Financial Advisor. Read more about online trading and receive complimentary access to the Technical Analysis Series at Online Trader Today.
You can leave a response, or trackback from your own site.